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Godley economics (!!)
 Part II illustrates work conducted by
and with Wynne Godley:
 Monetary Economics: An Integrated
Approach to Credit, Money, Income,
Production and Wealth.
Origins
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Two strands of research linking stocks
and flows:
Godley and Cripps (1982) at Cambridge,
Cambridge Economic Policy Group,
New Cambridge school (1970’s).
Tobin (1982) and his associates at Yale,
the ‘pitfalls approach’ (1969)
the New Haven school.
Revival
 New impetus with the more recent works of
Godley (1996, 1999), which combines
elements of the two strands, and adds
behavioural equations conducive to
simulations.
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(see Dos Santos (2002) for a
general assessment).
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New School University (Lance
Taylor, A. Shaikh, W. Semmler).
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General features
Tobin (1982, Nobel Lecture)
Models ought to track stocks;
Models should have several assets and
rates of return;
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Models include financial and monetary
operations
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Models include the sectoral budget
constraints
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and the adding-up constraints in
portfolio equations
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Other key features
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There cannot be any black holes.
 “The fact that money stocks and flows must
satisfy accounting identities in individual
budgets and in an economy as a whole
provides a fundamental law of
macroeconomics analogous to the principle
of conservation of energy in physics”
(Godley and Cripps 1983).
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There are intrinsic dynamics, Turnovsky
(1977)
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There are lag dynamics, to avoid
telescoping time (Hicks, 1965)
Simulations
 Because the models easily run up a
high number of equations, the
simulation method is put to the
forefront.
 Hopefully, it can resolve some
controversies among theorists.
Procedural rationality
 Agents react to disequilibria on the basis of partial
adjustment functions.
 There is no need nor no room for the rational
expectations hypothesis.
 Still agents in our models are rational: they display a
kind of procedural rationality, sometimes misleadingly
called weak rationality or bounded rationality, or more
appropriately named reasonable rationality.
 They react to new information.
 They entertain norms
 They may revise these norms
Models are Kaleckian or Kaldorian
They are demand-led
Imperfect competition,
Imperfect information,
Markup pricing,
Fixed technical coefficients,
The relevance of income distribution,
The role of capacity utilization and corporate retained
profits,
 the importance of lags and time,
 Long run trends being conceived as “a slowly
changing component of a chain of short period
situations” (Kalecki, 1971: 165)
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Godley models are PK models
 Emphasis on monetary economics
 The monetary side is integrated to the real
side
 There is a link with the monetary circuit
 Closures are based on the notion of
endogenous money
 Disequilibria can be studied
 There are inflation-accounted measures of
the main variable
Three tools for stock-flow
consistency
 A balance sheet matrix
 A transactions flow matrix
 A revaluation (or reconciliation)
account
The quadruple entry principle
 « Because moneyflows transactions
involve two transactors, the social
accounting approach to moneyflows
rests not on a double-entry system
but on a quadruple-entry system »
(Copeland, 1949)
First step of the monetary circuit
with private money
Households
Production firms
Current A.
Banks

Capital A.
Capital A.
loans
+ Lf
- L
0
deposits
- Mf
+ M
0

0
0
0
Consumption
Investment
Wages
The second step of the monetary
circuit with private money
Households
Production firms
Current A.
Capital A.
+I
-I
Banks

Capital A.
Consumption
Investment
Wages
+ WB
- WB
 loans
0
+ Lf
 deposits
- Mh

0
0
0
0
- L
0
+ M
0
0
0
The first step of government expenditures
financed by the central bank
Hholds
P roduction Banks
firms
Current
Governt Central
bank
Capital

Capital
Govt. exp.
Income
[GDP]
change in
cash
- Hg
+ H
change in
deposits
0
0
change in
bills
+ B
- Bcb
0

0
0
0
The second step of government
expenditures financed by the central bank
Hho lds
Govt.
exp.
P roduction
firms
Ba nks
+G
Govt
Central
bank
-G

0
Income
[GDP]
- Hb
Change
in cash
Change
in
deposits
- Mf
+ M
Change
in bills

0
+ H
0
0
0
+ B
- Bcb
0
0
0
0
First step in government expenditures in
overdraft system
P roduction
firms
Banks
Current
Ca pita l
Govt
Ce ntral
bank

Ca pital
Govt. exp.
Income [GDP]
Change in
cash
Change in
deposits
+ M
- Mg
0
Change in
ba nk loa ns
- L
+ Lg
0
0
0
0
Change in
central bank
advances
